Home / About Us / Case Studies

Case Studies

These are some situations that actually occurred; names are omitted to protect identities.

Form 2553 a�� S Corporation election

Non-client business owner contacted me on September 15th regarding his assumed income tax liability and whether there was anything he could do to reduce it. I immediately asked, a�?Do you operate as an LLC?a�? He replied yes and because he called on September 15th he could make a tax election that day to enable his LLC to be taxed as an S Corporation effective on January 1st of the prior year and thus, greatly reduce his tax bill. By the way, there would have been no relief if had he contacted me just one day later.

Lesson Learned a�� A business owner can determine tax structure after the prior year has come and gone. Also, do not operate your business under strictly a trade name and instead, create a legal entity (limited liability company or profit corporation) from inception to give yourself multiple tax structure options.

Form DR 0074 – Certification of Qualified Enterprise Zone Business

Non-client business owners contacted me after their returns had been prepared and were searching for a new CPA. I asked during our meeting, a�?Do you know if you operate within an enterprise zone?a�? They looked at each other and stated that they didna��t know. I immediately went online to search the enterprise zones in their county and determined that indeed they did and added that given the number of employees and independent contractors that they may be eligible for a sizable Colorado state tax credit. I was hired and later followed up with the county administrator, who permitted the taxpayer to file for certification for each year it applied.

Lesson Learned a�� Be aware of where you operate or may relocate your business, especially first year ventures. Also, a business owner can apply for certification well after initial qualification.

Federal Payroll Tax Returns

Non-client business owner and internal bookkeeper contacted me after they received another series of letters from the Social Security Administration. Upon review of the agency letters and their prior CPAa��s response, I quickly determined that grave reporting errors had been made within the quarterly Forms 941 and annual Forms W-3 and W-2. I stated that corrected forms for 11 quarters would need to be prepared and that the affected employees would be able to amend their own individual income tax returns for the overstated taxable wages arising from improper reporting of benefit withholdings.

Lesson Learned a�� Self-prepared payroll by non-experts should be checked, rechecked and checked once more by an outside party to make certain amounts are properly stated. Therefore, outsourcing your payroll function and the related liability is a rather smart business decision and occasionally less costly.

Partner Basis a�� Deductible Losses

Non-client business owner contacted me about his concerns regarding the preparation of his individual income tax returns and wished to have a second paid preparer take a look before he filed them. I reviewed the returns and related tax documents and quickly surmised that losses reported on his Schedule K-1 were not allowed due to a lack of apparent partner basis but were taken by original paid preparer. I queried as to whether or not the partnership return had been prepared correctly and requested a copy. Upon review, I determined that each Schedule K-1, Section K a�� Partnera��s Share of Liabilities, had not been reported properly at year end. I amended the partnership return and prepared the related individual return, taking the allowable loss and reported the partner basis justifying the allowable loss.

Lesson Learned a�� Sections G through L on Form 1065 Schedule K-1 are critical, especially when a loss is reported. Also, business and the business ownera��s individual returns should be prepared by the same preparer.

Tax Accounting Method a�� Cash versus Accrual

As I began working on a new clienta��s annual S Corporation return I noticed that the prior yeara��s return had been incorrectly prepared. The prior paid preparer failed to properly compute the accrual-to-cash adjustments as the owner converted her business from a sole proprietorship to an S Corporation. Significant tax would be due if the understated revenue was properly reported. Upon further review, it appeared that cash basis should not have been selected as customer deposits existed. Therefore, I amended the prior year return selecting the proper tax accounting method and reported the appropriate conversion amounts. And in turn, cut her tax liability in half.

Lesson Learned a�� Tax accounting method selection is a critical decision that is made with the initial business return and forward looking analysis is required, even for roller coaster start-ups.

Business Bad Debt

Non-client taxpayer contacted me about the reporting requirements for a post-ownership transaction. He stated that he had been a shareholder in an S Corporation, terminated his interest a year earlier and now had just paid off this S Corporationa��s line of credit balance since the remaining owner had filed personal bankruptcy. I stated that the bank had every right to go after him since the line of credit agreement must have included a personal guarantee by both owners and he had not stricken his name upon termination as a shareholder of the S Corporation. I further stated that the amount paid to the bank could be treated as a business bad debt and thus, not be subject to the $3,000 capital loss limitations. I was hired for his continuing business and individual accounting and tax needs.

Lesson Learned a�� When departing a business venture with other owners, remove your name from all obligations, such as leases and loans, or have the attorneys draft legal documents absolving you of future liability.

Tax Return Filing

As I began working on a new clienta��s annual individual return I noticed that business activity had been reported on Schedule F in the past when instead the activity appeared that it should have been reported on Form 1065 a�� Partnership Return of Income, given the ownership makeup and losses incurred. They stated that the prior CPA had originally planned to report the activity on Form 1065 from inception five years earlier but decided against it for reasons unknown. I replied that Form 1065 is appropriate, especially in light of the nature of the business and future business plans. Client agreed and I prepared Form 1065 going forward, which reflected both the P&L activity and balance sheet components.

Lesson Learned a�� How to report business activity should not be merely based on perceived annual maintenance cost savings and instead, should be based on sound business principles and goals.
stopping metformin for pcos effect

Commercial Personal Property Declaration Schedule

As I began working on a new clienta��s annual C Corporation return I noticed that a number of older tangible assets were listed within their depreciation schedule. I suggested that they review the list and determine which ones were now obsolete, previously sold or simply junked because it didna��t make sense to report non-existing depreciable assets to the county and continue to be taxed on them. They quickly followed up and I subsequently prepared the annual county return with the updated and proper listing of long-lived assets. The tax savings turned out to be nominal, but was still a smart business practice.

Lesson Learned a�� Regularly review your depreciation schedule since Colorado businesses, whether operating as a sole proprietor, corporation or partnership, are subject to double taxation on their long-lived assets a�� first at the time of purchase (sales tax) and again over the estimated life of the asset (personal property tax).

Form DR 1316 a�� Colorado Source Capital Gain Affidavit

A client of mine received a Schedule K-1 from a partnership interest she held, which leased and occasionally sold residential real estate. I noticed a rather substantial gain reported, and from the attached information regarding specific property allocations, I went online to the county in order to determine holding period by the partnership. The property sold appeared to qualify for Colorado tax-free gain status so I asked the client to contact the partnership return preparer or the managing member of the partnership for a copy of Form DR 1316 if it had been filed with the partnership return because her Colorado K-1 failed to report the proper decrease to federal taxable income. The other CPA forwarded the requested affidavit form filed at the partnership level, justifying my clienta��s eligibility to treat the gain allocation as tax-free in Colorado.

Lesson Learned a�� The State of Colorado permits certain source sales of property and business interests as free from tax if acquired after May 9, 1994 and held at least 5 years.

Net Operating Loss a�� Election to Waive Carryback

A client hired me to solely review and adjust his self-prepared Schedule C for the two years he owned a small retail establishment. The following year, the former client contacted me and asked about his net operating loss (NOL), which had been generated by losses from the business. I queried, a�?Did you make an election to relinquish the entire carryback period so you could instead carry forward the loss?a�? He stated he had not and thus, had no choice but to carry back the loss, which would involve considerable cost necessary to amend prior returnsa��plus, the taxpayer was in a much lower tax bracket in those years than the current year. A costly mistake made by the taxpayer. There was no guarantee that I would have made the right decision if I was preparing his entire individual tax return, but at least I would have asked a number of questions to determine the proper decision as to whether or not to waive the carryback option.

Lesson Learned a�� Self-preparing your return may come back to haunt you, especially for business and leased property owners, due to tax code complexity.

Estate a�� Schedule K-1

A new client of mine dropped off their tax documents in late August and I noticed that a Form 1041 Schedule K-1 was issued to one of them arising from a relativea��s estate. On Line 6 of this Schedule K-1 reported an allocable IRA distribution to the beneficiary who now had the responsibility to report the income and pay the related tax because the estate was likely listed as the IRAa��s beneficiary or no beneficiary was listed at all or the estate had distributed all cash needed to pay the tax related to income in respect of decedent (IRD). The client was unaware of the tax consequences of lump-sum distribution and unaware of the potential to rollover and stretch the tax hit by continuing to defer. The personal rep and estate attorney failed the estate beneficiaries.

Lesson Learned a�� Estate planning is critical for all estates, not just for estates in excess of the federal exemption ($3.5M). Accordingly, make certain your IRAs, pensions, annuities and life insurance contacts have named primary and secondary beneficiaries. Otherwise, the tax consequences can be rather deflating.


Non-client taxpayer contacted me after receiving a letter from the local branch office estimating tax due in excess of $100K based on third-party forms filed with the Internal Revenue Service since 2000. Upon review of his records for the 8 years outstanding, it turned out the IRS appeared to owe him approximately $50K. Unfortunately, less than a third was refunded to him since the IRS only refunds tax overpayments if delinquent returns are filed within 36 months of original due date. However, there is no time limitation if he had actually owed money for any of the outstanding tax years.

Lesson Learned a�� File your income tax returns in a timely manner whether you expect a refund or must pay in.

Legal Status a�� Delinquent or Noncompliant Standing

Non-client business owner was searching for a new CPA and met with me as a candidate to replace his former CPA. Afterwards, I emailed him regarding some public records findings I uncovered that his legal entity was not in good standing as it appeared that his registered agent failed to file an annual report with the state. Now the business was deemed delinquent and a curing action was required to be taken immediately. He appreciated the follow-up and hired my practice for his accounting and tax needs.

Lesson Learned a�� Dona��t assume your registered agent will perform all the necessary maintenance tasks to keep your legal entity in good standing with the state. Most states have information online on what is required to be done each year and many tasks now can be performed online with fees payable via credit card.

Business Purchase

Non-client individual has been searching to acquire a business in her area of expertise for more than a year. She forwarded two local opportunities which, upon review, were grossly overvalued; she would have made the same mistake the current owners made when they acquired their respective previously existing business a�� paid far too much for goodwill. While discouraged, she continues to search for the appropriate business of her dreams.

Lesson Learned a�� Follow your passion, but dona��t make a financial mistake that may take a lifetime to dig out from. Generally, business acquisition burdened with debt forces the owners to work in their business, not on their business.